| USA The Consumer Price Index rose a consensus-matching 0.2% in August. This came in the wake of another 0.2% increase the prior month. Price in the energy segment fell 0.8% on declines for gasoline (-0.6%), fuel oil (-1.9%), electricity (-0.7%) and piped gas services (-1.9%). The cost of food, meanwhile, edged up 0.1%. Year-on-Year, headline inflation came in at a 42-month low of 2.5%, down from 2.9% the prior month and in line with the median economist forecast. One would have expected the news that headline inflation had fallen to a 42-month low in August to be greeted with joy. Unfortunately, it was accompanied by an above-consensus result on the core inflation front which spoiled the fun. And while the miss in the latter segment was small enough to go unnoticed on a 12-month basis, it still triggered a reaction on the bond market, with yields jumping upwards. As has been the case in three of the last four CPI reports, energy prices weighed on the headline print, but this was to be expected given a retreat in gasoline prices. The cost of food, meanwhile, registered yet another subdued gain which allowed the year-on-year measure in that segment to ease to a 53-month low of 2.1%. The core goods segment wasn’t responsible for the upward surprise in August, as it registered a fourteenth decline in the past 15 months. This bout of weakness reflects a host of factors such as a rebalancing of consumer demand towards services, a loosening of supply chain constraints and a drop in producer prices in China, which is helping to drive down import prices. But above all, it has been driven by a sharp slowdown in the used car sector, where prices have come down no less than 20.2% since the all-time record reached in February 2022. Given the explosion of financing costs observed in that market and the rapid increase in supply, further declines are to be expected going forward. And while the two markets do not always evolve in lockstep, new vehicles prices may retrace in the next few months, albeit to a lesser extent. This should keep goods prices in a state of mild deflation for a few more months. If not on the goods side, the root cause of August’s disappointment could instead be found in the core services segment. Two categories had a disproportionate impact: transportation and shelter. In the first case, the 0.9% monthly increase was largely due to a sizeable gain in airline fares. As this category tends to be very volatile, and as the monthly gain followed a cumulative decline of 10.9% over the previous 5 months, there is little worry about this segment derailing the Fed’s rate-cutting plans. The rise in the cost of shelter, on the other hand, was a little more worrying as it resulted in the first increase of the year-on-year measure in 17 months (from 5.1% to 5.2%). The US Federal Reserve has made it clear that the time for a policy rate cut has arrived. However, the magnitude of the cut remains an open question and is sure to be a topic of debate at next week’s FOMC meeting. Futures markets continue to price in at least a 25-basis point cut with a 50% chance a 50-basis-point cut, with valid arguments for either move. Fed Chair Jerome Powell’s comments following the decision may provide guidance on the nature of this rate-cutting cycle, although his comments at the Jackson Hole Economic Symposium in August provided little new information. The Fed has acknowledged that it remains in restrictive territory and wants to get back to the neutral rate of interest, which it currently puts at around 2.8%. The Producer Price Index for final demand rose 0.2% MoM in August, a tick short of the consensus estimate. This follows a flat reading the prior month. The core measure, which excludes food and energy, was up 0.3% instead of rising 0.2% MoM as per the consensus forecast. The goods PPI was flat in August following a 0.6% gain in July. Energy fell 0.9% in the month. For the services index, prices rose 0.4% in the month, with the largest increase coming from trade (+0.6% MoM). On a 12-month basis, the headline PPI increased 1.7%, a sharp improvement from 2.1% the previous month. The core PPI, however, rose from +2.3% in July to +2.4% in August. The Import Price Index (IPI) declined 0.3% in August, more than the median economist forecast calling for a -0.2% print. The headline print was negatively affected by a 3.2% decline in the price of petroleum imports. Excluding this category, import prices still declined, but by a more moderated 0.1. On a 12-month basis, the headline IPI fell from 1.7% to 0.8%. The less volatile ex-petroleum gauge moved from 1.1% to 1.2%. The NFIB Small Business Optimism Index fell from 93.7 to 91.2 in August, a first decline in five months. As a result, the index remained well below its historical average outlays in the next three months increased from 23% to 24%, a level still far below the long-term average for this indicator (≈29%). While a recovery in investment would be desirable for stronger productivity, this seems unlikely in the short term as financing conditions remain difficult. Among stock market volatility, the imminent election and the gloomier economic outlook, the uncertainty index surged to 92, its highest level since October 2020. The 142K payroll print in August showed that the labor market is decelerating rather than rapidly deteriorating. Initial jobless claims this week remained relatively contained at 230K, suggesting that mass layoffs are not in the cards. But signs of softening can be easily found elsewhere. NFIB hiring plans continued to trend lower in August as the net percent of small businesses actually adding head-counts reached its lowest share in two years. The preliminary release of the University of Michigan Consumer Sentiment Index for September showed a rebound from 67.9 to 69.0, slightly above expectations (68.5). An improvement was seen in current economic conditions (from 61.3 to 62.9) and in consumer expectations (from 72.1 to 73.0). The inflation outlook also improved in the 12-month outlook (from 2.8% to 2.7%), while the 5/10-year outlook worsened a tick to 3.1 %. Details of the report, however, showed increasing concern among consumers, notably about real income. Indeed, the probability of seeing real income increase plunged to 40.6, its lowest level since September 2013. The US Census Bureau Inflation-adjusted median household income was $80,610 in 2023, up 4% from the 2022 estimate of $77,540 and close to the pre-COVID peak of $81,210 reached in 2019, the bureau said Tuesday. The US consumer has been a bright spot during this economic expansion, with retail sales and housing particularly strong. Consumer spending in the US accounts for approximately 70% of GDP. Stocks managed to post solid gains and largely recovered from the previous week’s steep losses, which saw the S&P 500 Index suffer its worst weekly decline since March 2023. Growth stocks outpaced value shares by a wide margin, helped by strong performance from technology stocks. NVIDIA was a particularly strong contributor after the chip giant offered a positive outlook on artificial intelligence at an investment conference In terms of data release, the retail sales print is out on Tuesday. Retail sales surprised to the upside in July, coming in twice as fast as consensus expectations. Headline retail sales rose an impressive 1.0% on the month, while control group retail sales notched a 0.4% gain. This amounted to a nominal gain of $6.8 billion, or 25% of the total gain from the prior two years in a single month. Auto sales, the largest component of retail sales, were the main driver of the increase, as sales of motor vehicles and parts rose 3.6% on the month. Grocery and building materials stores each contributed to the gain solidly, with an increase of 0.9% each. Only three of 13 retail categories reported sales declines on the month, and these slower sales were concentrated in some of the smallest categories (clothing, miscellaneous and sporting goods) Industrial production is also out on Tuesday and it left much to be desired in the July report. Manufacturing production fell 0.3%, and mining output was flat in a month when Hurricane Beryl temporarily curtailed some refinery activity in the Gulf. Motor vehicle and parts production weighed heavily on manufacturing production, as it fell 7.8% in July, the largest such decline this year. Elsewhere, manufacturing production was not all sour as machinery output (1.4%) and computers & electronics (1.5%) both rose at a solid clip. The largest decline in the report came from utility output, which declined a stark 3.7% on the month. Utility production had been poised for some giveback following a string of particularly strong monthly jumps between April to June (3.6%, 2.2% and 2.6%, respectively). That it came in a month with a weak showing for manufacturing and mining made the giveback sting a bit more. UK Economic growth figures for July have been released this past week. The figures show that growth was flat MoM, the same print as June’s figure and lower than market expectations of 0.2%, although the 3MoM comparison posted a much healthier 0.5% growth. The services sector, which dominates the UK economy, saw a minor advance of 0.1% MoM but this was offset by falls in production and construction output of 0.8% and 0.4% respectively. Monthly construction output was down by 0.4%. The largest positive contribution to July’s growth in the services sector came from the information and communication sub-sector, primarily due to computer programming, consultancy and related activities. Services output was also aided due to there being fewer days of industrial action in the NHS compared to June. The largest contributor to the fall in production output on the month was manufacturing output. The UK unemployment rate for July has come out at 4.1%, employment change was a positive 265k, while the claimant count (a more up-to-date, but less representative figure) for August was 23.7k. While it looks as if some of the employment data is more buoyant than expected, as has been the case for much of this year, this data carries with it a caution as the Labour Force survey upon which it is based is suffering from small sample sizes and is undergoing revisions. The pay figures are driven by rises in accommodation and food services (which, along with being relatively low-paid sectors, naturally see lots of pressure in the summer months), along with above median pay rises for motor services, as well as arts and entertainment. The concern has been, and continues to be, that well above productivity justified earnings increases granted by the new government to a range of public sector workers will spill over and trigger more widespread demands for similar pay rises in the private sector. If this were to happen, it would without doubt trigger a response from the Bank of England’s Monetary Policy Committee and lead to a marked slowing, even stalling, of further reductions to interest rates. Wages are likely to be somewhat stickier than the markets anticipate and for interest rates to fall more slowly than the consensus expects as a result. These concerns are likely to manifest themselves over the course of the autumn, while earnings figures point to more seasonal pressures. EU The European Central Bank (ECB) cut its deposit rate by 25 basis points, which was widely anticipated. The Governing Council acknowledges that inflation data has come in broadly as expected, but that service inflation is sticky (4.2% in August) and that wages are still rising faster than is compatible with the inflation target. During the press conference, President Lagarde highlighted the elevated wages, while confirming that they are on a declining, although bumpy, path. The ECB still holds on to a full wait-and-see approach, reiterating that it cannot commit to a specific path for the policy rate. This ECB decision came with new staff projections. While the inflation forecast was broadly intact, except for a marginal change in core inflation, the June projections for growth were revised down slightly, after recent weaker-than-expected data. The forecast now states that GDP will grow by 0.8% in 2024, down from 0.9% in the June projections. GDP for 2025 and 2026 were revised down 0.1 percentage point each, to 1.3% and 1.4% respectively. Ireland will receive a €13 billion windfall after the European Court of Justice ruled that Apple underpaid its corporate taxes over a number of years. Ireland spent millions in legal fees to oppose the EU’s contention that it gave Apple a sweetheart deal. A commission headed by former ECB President Mario Draghi made key recommendations to increase the competitiveness of the European Union. The recommendations include relaxing competition rules to enable market consolidation in sectors such as telecoms, the integration of capital markets by centralising market supervision, greater use of joint procurement in the defence sector, and a new trade agenda to increase the EU’s economic independence. The report suggests that if reforms are not adopted, Europe will fall further behind the US and China. There have been calls for €750 to €800 billion in additional annual investment and the issuance of “common safe asset,” i.e., joint EU bonds. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.85% higher, lifted by an interest rate cut from the ECB. Germany’s DAX Index rose 2.17%, France’s CAC 40 Index gained 1.54%, and Italy’s FTSE MIB Index added 0.83%. CHINA Exports exceeded forecasts in August, rising 8.7% from a year earlier, up from 7% growth in July. Imports expanded a lower-than-expected 0.5% in August, easing from July’s 7.2% gain. The overall trade surplus increased to USD 91.02 billion from USD 84.65 billion in July. China’s exports have been a bright spot for its economy, which is mired in a prolonged property crisis. However, analysts cautioned that overseas demand could face volatility due to the slowing US economy and rising trade tensions. China’s consumer price index rose 0.6% in August from a year earlier, up from 0.5% in July, but below economists’ forecasts. Core inflation, which strips out volatile food and energy costs, increased 0.3%, slowing from July’s 0.4% rise, and marked the lowest level in over three years. The producer price index fell 1.8% from a year ago, lagging forecasts and deepening from July’s 0.8% drop, extending the deflation in factory gate prices that began in late 2022. The latest data spurred calls for Beijing to roll out more forceful measures to stave off a negative cycle of falling corporate revenue, wages, and spending that many analysts believe threatens China’s longer-term growth Chinese stocks declined as weak inflation data spurred concerns about a downward price-wage spiral weighing on the economy. Both the Shanghai Composite Index and the blue-chip CSI 300 Index fell 2.23%. In Hong Kong, the benchmark Hang Seng Index gave up 0.43%, according to FactSet. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Reuters, M. Cassar Derjavets. |
